Estimating demand for differentiated products with error in market shares
Amit Gandhi Gandhi,
Zhentong Lu and
Xiaoxia Shi
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Amit Gandhi Gandhi: Institute for Fiscal Studies and University of Wisconsin-Madison
No CWP03/13, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies
Abstract:
In this paper we introduce a new approach to estimating a differentiated product demand system that allows for error in market shares as measures of choice probabilities. In particular, our approach allows for products with zero sales in the data, which is a frequent phenomenon that arises in product differentiated markets but lies outside the scope of existing demand estimation techniques. Although we find that error in market shares generally undermine the standard point identification of discrete choice models of demand, we exploit shape restrictions on demand implied by discrete choice to generate a system of moment inequalities that partially identify demand parameters. These moment inequalities are fully robust to the variability in market shares yet are also adaptive to the information revealed by market shares in a way that allows for informative inferences. In addition, we construct a profiling approach for parameter inference with moment inequalities, making it feasible to study models with a large number of parameters (as typically required in demand applications) by focusing attention on a profile of the parameters, such as the price coefficient. We use our approach to study consumer demand from scanner data using the Dominick's Finer Foods database, and find that even for the baseline logit model, demand elasticities nearly double when the full error in market shares is taken into account.
Keywords: Demand Estimation; Differentiated Products; Profile; Measurement Error; Moment Inequality. (search for similar items in EconPapers)
JEL-codes: C01 C12 L10 L81 (search for similar items in EconPapers)
Date: 2013-02-20
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (39)
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Working Paper: Estimating demand for differentiated products with error in market shares (2013)
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